Crowley v. Lafayette Life Ins. Co., 14569

• Decision Date: 07 June 1984
• Docket Number: No. 14569,14569
• Citation: 683 P.2d 854,106 Idaho 818
• Court: Idaho Supreme Court
• Parties: E. Drew CROWLEY and Galbraith & Green, Inc. of Idaho, an Idaho corporation, Plaintiffs, Counterdefendants, Respondents, v. The LAFAYETTE LIFE INSURANCE COMPANY, a foreign corporation, Defendant, Cross-Defendant, Counterclaimant, Appellant, and Trustees of the Packing House Division of Amalgamated Meat Cutters, Employee Union Local 368 Trust, unincorporated association, said trustees being, Lewis Sorini, Richard Keim, Lamont Baker, Sam Nettinga, Eldon Adams, Everett Grimes and Elvin Hightower, Defendants, Counterclaimants, Cross-claimants.

Page 854

683 P.2d 854

106 Idaho 818

E. Drew CROWLEY and Galbraith & Green, Inc. of Idaho, an Idaho corporation, Plaintiffs, Counterdefendants, Respondents, v. The LAFAYETTE LIFE INSURANCE COMPANY, a foreign corporation, Defendant, Cross-Defendant, Counterclaimant, Appellant and Trustees of the Packing House Division of Amalgamated Meat Cutters, Employee Union Local 368 Trust, unincorporated association, said trustees being, Lewis Sorini, Richard Keim, Lamont Baker, Sam Nettinga, Eldon Adams, Everett Grimes and Elvin Hightower, Defendants, Counterclaimants, Cross-claimants.

No. 14569.

Supreme Court of Idaho.

June 7, 1984.

Richard C. Fields, and Glenna M. Christensen, of Moffatt, Thomas, Barrett & Blanton, Boise, for defendant, cross-defendant, counterclaimant, appellant

John P. Howard, of Quane, Smith, Howard & Hull, Boise, for plaintiffs, counterdefendants, respondents.

DONALDSON, Chief Justice.

The Amalgamated Meat Cutters Union Local 368 Trust (Trust) was created to provide medical benefits to participating Union members and their families. Respondents, Galbraith & Green, Inc. and its President E. Drew Crowley (Crowley), were hired by the Trust as consultant and plan manager. In May, 1976, the Trustees decided to establish a self-funded insurance program to provide the desired benefits, and directed Crowley to obtain reinsurance coverage which would reimburse the Trust for major claims which it might be required to pay.

Two types of reinsurance were provided by appellant Lafayette Life Insurance Co. (Lafayette) to the Trust. The first type was aggregate excess reinsurance (aggregate reinsurance) designed to reimburse the Trust when the aggregate net claims exceeded a stated amount during the contract year. The second type was specific excess reinsurance (specific reinsurance) which was designed to reimburse the Trust for any large individual claims it was required to pay. Under the specific reinsurance, the Trust was solely responsible for the first $15,000.00 of any individual claim. Appellant Lafayette would reimburse the Trust for eighty percent (80%) of any claim in excess of $15,000.00 paid by the Trust during the contract year. Both types of reinsurance had an effective date of June 1, 1976. In addition to the reinsurance, the Trust also obtained a group life insurance policy from Lafayette to cover the Union members.

The initial agreement as to all three types of insurance was reached prior to June 1, 1976. Thereafter, on July 2, 1976, Crowley submitted a group insurance application and a binder premium in the sum of $2,000.00 to Lafayette. The signing of the written contracts by Lafayette's representative took place on October 18, 1976, and the chairman of the Trust signed the written contracts on behalf of the Trust on December 1, 1976.

The premiums for the specific reinsurance were based on the number of employees and dependants enrolled in the plan each month. Lafayette, on September 8, 1976, mailed Crowley the forms used to compute the monthly premium for the specific reinsurance. On October 19, 1976, Lafayette advised Crowley by mail that no premium for the specific reinsurance had been received, and asked for payment. Another letter was sent dated December 3, 1976, again asking for payment on the specific reinsurance, and declaring Lafayette's intention to "cancel" the contract if payment of the premium was not forthcoming. No monthly premium payments were ever received for the specific reinsurance (apparently due to a misunderstanding on the part of one of Crowley's employees), and, on February 11, 1977, Lafayette notified Crowley that the specific reinsurance had been canceled retroactive to June 1, 1976, for nonpayment of premium. As of February 11, 1977, no individual claims had arisen which exceeded $15,000.00.

Several claims arose after February 11, 1977, which eventually exceeded $15,000.00. Lafayette refused to reimburse the Trust for the amount in excess of $15,000.00, claiming that the specific reinsurance had been rescinded previously. Crowley filed suit for declaratory judgment for a declaration of rights under the insurance policies. Both Lafayette and Crowley subsequently moved for summary judgment. The district court granted partial summary judgment declaring

"that Lafayette Life failed to unilaterally cancel the policy in accordance with the express provisions of the policy and that the policy was still in force when the claims arose unless it is proven at trial that it was mutually cancelled, and, if so, whether such cancellation, if any, was pursuant to the policy and therefore not retroactive, or by a new contract made outside of the provisions of the policy which would operate retroactively."

Prior to trial, Lafayette and Crowley, recognizing that one or the other was liable to the Trust for payment of the excess claims, entered into an agreement with the Trustees settling all claims of the Trust against the parties. Pursuant to that settlement agreement, Lafayette and Crowley each paid $75,000.00 to the Trust. Subsequently, the district court granted Crowley's motion for summary judgment on the remaining issues. This appeal followed.

Lafayette Life sets forth three main contentions on appeal. Initially, Lafayette argues that it properly rescinded the specific reinsurance agreement. Secondly, Lafayette contends that it substantially complied with the termination provisions of the specific reinsurance agreement. Finally, Lafayette asserts that Crowley, as agent Before addressing the issues as set out above, we note that our standard of review is well established. Summary judgment is to be granted only after the facts contained in the pleadings, depositions, admissions, and affidavits have been construed most favorably to the nonmoving party, and it is clear that there is no genuine issue as to any material fact. Anderson v. Ethington, 103 Idaho 658, 651 P.2d 923 (1982); Huyck v. Hecla Min. Co., 101 Idaho 299, 612 P.2d 142 (1980); I.R.C.P. 56(c).

for the Trust, consented to the termination of the specific reinsurance agreement.

I. RECISSION

It is Lafayette's position that it was entitled to rescind the specific reinsurance agreement pursuant to general contract law. Lafayette begins by asserting that it is important to distinguish reinsurance contracts from common insurance policies. Based upon this distinction, Lafayette argues that although an individual consumer who obtains an insurance policy is entitled to some degree of judicial protection, an insurer who obtains a reinsurance contract is not entitled to that same degree of judicial protection since there is generally no disparity between the bargaining power of the reinsured and the reinsurer. Therefore, Lafayette contends that the rules of strict construction which are held to be applicable to common insurance policies should not be applied herein, but rather general contract principles should be applied. Lafayette concludes by asserting that rescission is available to one party where there has been a failure of consideration by the other party to the contract, and that Lafayette was entitled to rescind the specific reinsurance agreement because there was a failure of consideration in that the Trust, as of February 11, 1977, had failed to make any of the monthly premium payments on the specific reinsurance.

Rescission is equitable in nature and is intended to place the parties in the positions they occupied prior to the contract. Furthermore, rescission is available only when one of the parties has committed a material breach which destroys the entire purpose for entering into the contract. Blinzler v. Andrews, 94 Idaho 215, 485 P.2d 957 (1971). Also important herein is the rule of law that the party desiring to rescind a contract must, prior to rescinding, tender back to the other party any consideration or benefit received under the contract by the rescinding party. Haines v. Rowland, 35 Idaho 481, 207 P. 428 (1922); see generally 17 Am.Jur.2d Contracts § 512 (1964); 17A C.J.S. Contracts § 439 (1963).

It is undisputed that sometime during May, 1976, an agreement (presumably oral) was entered into between Lafayette and Crowley, who was acting for the Trust. According to this agreement, Lafayette was to provide the three types of insurance coverage discussed above effective June 1, 1976. Crowley did not submit an application for these three types of insurance until July 2, 1976, more than one month after coverage had begun. ¹ Furthermore, Lafayette did not sign the two reinsurance agreements until October 18, 1976, and the representative of the Trust did not sign these two agreements until December 1, 1976. However, both Crowley and Lafayette agree that beginning June 1, 1976, Lafayette was providing coverage. Therefore, we do not view the two reinsurance agreements and the group life insurance policy as separate agreements, but rather as terms of the original agreement reached during May, 1976. As such, the $2,000.00 Although we acknowledge that...